Wednesday, February 04, 2009

Some thoughts on KPN's vertical integration

Amsterdam finally published the Phase 2 plans, with the KPN/Reggefiber joint-venture, for its munifiber Citynet network. Phase 1 included 43k homes. Some notes:
  • No timescale for the 100k homes, let alone the final 250k ones.
  • I asked Ad Scheepbouwer about his views on KPN's stake in the passive layer. It has an option to acquire a majority in the Reggefiber joint-venture, but it could also allow it to dilute by raising third-party funding and ultimately get out of the infrastructure business altogether. Alas, Ad keeps his options open at this time. Reggefiber, for that matter, has no ambitions whatsoever to become a service provider (they do have a stake in the XMS joint venture with BBned).
  • I liked mayor Job Cohen's referral to earlier PPP projects: the Amsterdam banking industry (400 years ago), the North Sea - Amsterdam channel, Schiphol airport and the wildly interesting AMS-IX.
KPN will also be operating the active layer (BBned is the active operator on the Phase 1 section), and be service provider as well. In other words, it will be a vertically integrated operator/provider once more. No exclusivity in the active layer, though (which BBned has). Some more notes:
  • It remains to be seen if it works. The regulator should monitor KPN's actions (pricing) very closely.
  • Will only SPs compete, or will there be alternative active operators as well? In the Phase 1 areas, competition is limited to SPs, because of BBned's exclusivity. However, the number has gone down drastically, and two (Alice and InterNLnet) are owned by BBned itself. Is there no interest in competing in the services layer only?
  • Competing in the active layer is a lot more expensive, but I believe this is equivalent to LLU investments in the DSL world (cutting out the wholesale payments to KPN to improve the business case). This implies two things: 1. You need scale. 2. Since FTTH is the end game, there is no risk of becoming obsolote (which has happened to LLU operators, who were subsequently hoovered up by KPN). In other words: a new entrant, operating the active layer (and bringing its own SP) could alter the Dutch landscape dramatically. I see a big opportunity for other incumbents to first buy BBned (it's for sale!) and then expand.
  • Obviously, some things stand in the way of operators expanding into the Netherlands: 1. The global financial crisis, 2. focus on expansion into emerging markets.
  • Still, there is also a case for European incumbents to enter the Netherlands as service providers only: find some extra growth from an infrastructure-light approach, get experienced in an open access FTTH environment, hurt your competitor (KPN), etc. Now, of course you would ideally need a good brand name to make such a move. KPN is expanding Simyo (its MVNO) across Europe, which could serve as a mobile equivalent. How about Skype (it seems to be for sale ...)? It could be used as a vehicle for any incumbent and subsequently be enhanced with new products, turn it into a pan-European SP (and next get into the active layer).

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